MTQ – FY 2010 Analysis and Commentary Part 2

Part 2 of my analysis and review shall focus on MTQ’s business divisions, namely Oilfield Engineering and Engine Systems. I shall be comparing the proportion of revenues taken up by each division as well as delving into the net margins provided by each division. A year-on-year comparison will be made to judge if there has been any improvement in each division, and I will also comment on the overall business climate and environment for MTQ going forward, based on pertinent facts which I am aware of right now.

MTQ BUSINESS UNIT ANALYSIS

Revenue Breakdown – FY 2010 Vs FY 2009 (1H and 2H)


Looking at 1H FY 2010 revenue breakdown, Engine Systems and Oilfield Engineering roughly contributed equal proportions to total revenue, as compared to 1H FY 2009 when the ratio was more skewed towards Oilfield Engineering (at 55.9% versus 44.1%). This was due to the weakening of demand in the O&G sector as major players cut their E&P spending and caused a slump in oil prices (and hence demand for repair services which MTQ provides). On the other hand, revenues for Engine Systems remained fairly stable at around S$20 million, and were flat year-on-year, and this demonstrates steady demand for MTQES’ offerings in spite of the global financial crisis. From the first half analysis alone, it can be seen that despite Engine Systems being a much lower margin division as compared to Oilfield Engineering, it has a more stable revenue base and more sustained demand. Let’s move on to second half now (figures for 2H are derived by subtracting 1H figures from FY numbers).

For 2H FY 2010, the ratio of sales for both divisions remains constant as in 1H FY 2010, and this is due to the stronger sales in Engine Systems compared to 2H FY 2009 which helps to boost the revenue figure amid a slump for Oilfield Engineering. For 2H FY 2009, Oilfield Engineering took up nearly two-thirds of revenues (66.6%) while Engine Systems took up just one-third (33.4%). It should be noted that revenues for Oilfield Engineering recovered slightly in 2H FY 2010 compared to 1H FY 2010 (from S$19.7 million to S$20.6 million), while for Engine Systems revenue improved to S$21 million from 1H FY 2010’s S$20 million, presumably due to the scaling up of offerings by MTQES. If this division’s expansion gains more traction in FY 2011, we could potentially see a much higher revenue contribution in absolute terms, and in terms of proportion it could keep pace with the growth in Oilfield Engineering division (due to the recovery in the O&G sector). Of course, it can be argued that revenue growth is useless without corresponding margin growth, which is what I will tackle in the next section of this analysis.

For FY 2010, the ratio remains constant as per 1H and 2H of FY 2010, while for FY 2009 it can be seen that Oilfield Engineering takes up the lion’s share of revenues. Taken in context, this means that Engine Systems’ revenues are catching up with Oilfield Engineering, and will surpass this division in time to come if not for the planned Bahrain expansion. The last financial year has seen MTQES building up their capabilities by extending their reach into Northern Territory in Australia (and increasing their distribution network), as well as scoring a coup by partnering with Bosch to create Bosch Superstores for automotive parts. I envisage that revenues for Engine Systems will continue to grow and probably will surge past Oilfield Engineering, as Oilfield division’s recovery hinges on the global economic recovery and E&P spending by oil majors. Until the Bahrain facility is fully operational by FY 2010, I do not expect to see a big jump in revenues from Oilfield Engineering.

Margin Analysis by Division


Looking at the revenues comparison, it is clear that Oilfield Engineering suffered a slump for FY 2010, with revenues falling 27% to S$40.3 million. Engine Systems picked up steam, though, with revenues increasing 17.5% to S$41.1 million. This can be attributed to the Bosch Superstore deal which MTQES signed, and which commenced on November 1, 2009. Thus, the jump we see here represents just 5 months of increased sales. If we include the additional contribution over the full 12 months (for FY 2011), then the revenue should increase even more. Recall too that MTQES had purchased Premier Fuel sometime in March 2010, so the additional contribution should flow through beginning April 2010 (i.e. FY 2011). Overall, revenues fell by 9.3% which was reflective of the depressed economic situation due to the global financial crisis. Businesses regularly suffer some dip in revenues and earnings due to economic cycles, but as long as they remain profitable and are able to make use of the slump to grow their business and consolidate their positions, they will emerge much stronger from the crisis.

For segment net profit, Oilfield Engineering’s net profit fell 30.9%, greater than the fall in revenues of 27.2%. This indicated that costs had remained fixed and were unable to be reduced even in the face of decreased sales. However, since the difference is not very great (3.7 percentage points), I am inclined to conclude that net profit had fallen in line with sales. Of course, more evidence of this has to be seen from tracking net profit increase to sales increase in future periods. For Engine Systems, the jump in net profit as a result of economies of scale (from the Bosch Superstores) is apparent as revenue increased 17.5% while net profit increased 171%. This reflected better margins as Mr. Kuah did mention that incremental costs to stock up existing MTQES stores were minimal, while the tie-up with Bosch would significantly increase both their customer base as well as sales volume. The 2H FY 2010 figures would have justified his statement (but unfortunately, there was no breakdown given between 1H and 2H in the financial statements released on SGXNet) as sales value ramped up while costs were adequately controlled.

I had written in my analysis of purchase for MTQ that Engine Systems division had traditionally suffered from very low net margins, as was apparent from my 5-year analysis of the division’s margins. Part of the reason can be attributed to the loss-making Indonesian unit, which has since been liquidated. Re-structuring of the division also took some time and now, with better economies of scale kicking in from the Bosch tie-up, I can begin to see net margins creeping up, though they are still at pretty dismal levels. Net margins for Engine Systems increased from 1.4% in FY 2009 to 3.2% in FY 2010, which was a very respectable improvement. Moving forward, it remains to be seen if net margins can be further improved past the 5% level, as the purchase of Premier Fuel was only completed some time in March 2010. If what Mr. Kuah projected back in October 2009 was accurate, the increase in customers and cross-selling of MTQES’ own products combined with Bosch can allow for better sales figures, while keeping costs controlled. I believe that for this division, a net margin of 10% or more would be decent, and not the margins existing at current levels.

Part 3 of this analysis shall examine the prospects of each division, based on best available information; as well as comment on the Bahrain expansion and the risks involved, as well as the planned change in the capital structure of the Group (i.e. taking on more debt) in order to finance this expansion.

Sun Tzu - War On Business Part 6 (Witchmount Winery)

Part 6 of this series features James moving on to Australia, where he checks out a winery business and visits a vineyard owner. The scene is set in Melbourne, Australia and the vineyard is called Witchmount Winery (WW) and its owner is a man called Tony Ramunno (“Tony”). The background on this business is that it is a family business founded in the early 1990’s. The vineyard occupies many acres (exact area was not mentioned) and Tony’s wine had just won a prestigious award from France for “Best Shiraz In The World”. However, Tony did not really leverage on this award to establish networks or push for more sales, resulting in lost opportunities. Early in the program, James mentions that one of Sun Tzu’s sayings is “Always be ready to seize an advantage”. This is very true in war as well as business – if you have a superior advantage over your enemy (competitor), you should fully utilize it to win the war and battle. Tony’s Witchmount brand had good coverage as a result of the award but because he did not leverage on it, he let the opportunity slip to promote his wines to the next higher level.

When interviewed, Tony admitted that “sales was always a challenge” and that there were 15,000 wineries in Australia, thus competition was keen and it was mainly a pricing game as it would be difficult for consumers to differentiate between brands. James brought in 5 wine experts to taste Tony’s wines, and all agreed it had quality and was a good product, but the problem was differentiating it from the competition as other consumers may not have such discerning palates. According to James, it was a disappointment but not a disaster. Tony did not have a concrete plan to increase sales and was just plodding on currently, so that was a gap which needed to be filled. James cited one example where a sales rep from Tony’s office did not show up at a restaurant which was selling their wines, and it was this lapse in service which could make or break a good deal, as restaurants are the main channel for Tony to distribute his wines to (he has no retail presence).

James interviewed one of Tony’s employees called Adrian Machioiro and he mentioned that staff in general need more guidance from Tony when it came to higher-level decision-making. Tony was sometimes uncontactable, which resulted in many decisions being left by the wayside and it severely slowed down the process of getting things done. Management staff also got impatient as a result of these delays and it negatively affected overall staff morale. On a side note, Tony did comment that for Adrian’s case, he feels that he is not competent enough to execute some of the marketing initiatives which Tony himself had come up with, but he declined to elaborate on camera.

An Australian entrepreneur called Ash Hunter was called in to take a look at Tony’s business and comment on it. He mentioned that a glaring problem was that there was no budget drawn up for the business and the business also lacked a marketing team. There is no effective costing system in place to measure which wines brought in the highest contribution margin (defined as revenues less variable costs). As a result, it was impossible to know which wines to focus on selling more within Tony’s existing product line, and also which products to target the marketing and promotions on.

To add insult to injury, Tony also admitted problems in the distribution company which WW engaged, in terms of expectations and also the need for close monitoring. James mentioned another Sun Tzu line: “Let your methods be as infinite as your circumstances”. He was trying to state that Tony should try out different techniques for improving sales and distributing his products, but that Tony lacked a strategy and also the proper Public Relations department.

James then challenged Tony to come up with a campaign to push wines through to five-star restaurants to increase exposure for WW. Tony focused his efforts on Sofitel, which is a very highly-acclaimed 5-star hotel chain in Australia. A few weeks later, he managed to tie up with executives from Sofitel to launch a special dinner with 5-star meals to showcase WW’s wines. 6 wines would be presented to 60 invited guests, even though technically speaking Sofitel only agreed to carry 2 of WW’s wines. Tony’s staff Stephen Goodwin was tasked with matching wines to dishes in an appropriate manner (e.g. white wine for fish, red wine for meat) and this was done in a successful manner, resulting in very positive reviews and impressions of Tony’s wines.

Lessons to be learnt here:-

1) Lack of a defined sales and marketing strategy and plan – It was painfully obvious throughout the whole program that Tony was lacking in terms of sales plan and marketing strategy, and this caused sales to stagnate at WW and he was unable to bring the business to a higher level.

2) Know your competition – Tony mentions that there are 1,500 vineyards in Australia, so he should have done a simple survey or spent some money to try to find out more about his competition, in order to benchmark costs, pricing and best practices. In other words, he should actively try to learn from his competition instead of staying in his own “shell”, like a hermit.

3) Availability of Boss for strategic decision-making – It was obviously disruptive to the workflow when Tony could not be contacted to make important decisions, and by right he should have delegated some measure of decision-making authority to his Management Team, instead of retaining full control. While some may argue that Tony retains more control over key decisions with this type of Management style, ultimately when the business expands and grows it will become a problem unless he delegates some responsibility down.

4) Employee Morale and Employee Relations – During the program, it was alluded that Tony had some “issues” with his staff like Adrian for example, which would not be pleasant to highlight on camera. One has to wonder if other such problems exist with him and other staff, who may be disgruntled with his attitude or management style. Since employee relations are such an integral part of running a business, this is something which every business owner has to look out for. Morale can literally make or break a business!

5) Computing the numbers to review profitability, hence trimming product portfolio – This is a mistake which is not too common for businesses, not knowing which are your most profitable products! For the case of alcohol, the strange thing is that a particular vintage may sell very well but actually generate the least profits, as the CM is very low or even negative. Thus, Tony should run through the costing and come up with a detailed costing sheet (hire a cost accountant!) to see which products should be “dropped” and which he should continue to focus on.

6) Problems with Distribution Network – Tony should have put a stop to the poor distribution company’s practises a long time ago, but his argument was that this kind of relationship was difficult to disrupt and it was more of relationship rather than efficiency which caused him to retain the bad distributor.

All in, I feel Tony was probably a very good “wine” person, but not a very good businessman or manager at all! He made a lot of mistakes which a business person should not have made, and I dare say the business was built up to this scale because of his predecessors, and he is merely “taking over”. While the marketing campaign at Sofitel went well, it remains to be seen if he knows how to leverage on the success to scale the business up to a higher level; and also if he manages to resolve the lingering problems with his staff.

The next episode features another Australian business called Zak’s Surfboards, and is about the surfing industry and the sun, sand and sea!

Visit Witchmount Winery’s website at
http://www.witchmount.com.au/

MTQ – FY 2010 Analysis and Commentary Part 1

MTQ released their FY 2010 results on April 30, 2010 during lunch time, one of the earlier companies in my portfolio to release their full-year results (MTQ has a March 31 year-end, similar to Tat Hong and Boustead which will release closer to end-May 2010). Suffice to say the results looked surprisingly good considering their main Oilfield Engineering Division had taken a hit (this was already apparent in 1H FY 2010’s results) and that their Engine Systems had previously been highlighted by me as having very low operating margins. Even with the recent partnership with Bosch to create MTQ’s Bosch Superstores (managed by MTQES in Australia) and the purchase of Premier, I did not have high expectations for the Engine Systems division to pull off a good performance. I was pleasantly surprised on this count, as we shall see in the segment analysis for both divisions. In the meantime, this analysis will follow the usual pattern of financial statement analysis and commentary, followed by business division review (including margins) and lastly discussing prospects, plans, risks and potential hurdles for the Company.

Profit and Loss Analysis


As can be seen in the above table, I had plotted out the 1H FY 2010 numbers which were released by MTQ in November 2009, and alongside it I had added in the 2H FY 2010 numbers, which were derived from subtraction of the FY 2010 from the 1H FY 2010 numbers (MTQ conveniently left out 2H performance, so I had to do my own back calculations).

If we glance at 1H versus 2H, it is quite apparent that revenues improved dramatically in 2H as the dip was only 5.2% and was attributed mainly to Oilfield Engineering. Engine Systems saw a boost in revenues due to the aforementioned Bosch deal, and also the purchase of Premier which expanded MTQES’ network around Australia. Cost of Goods Sold had dropped by 17.1% for 2H against a drop of 15% for 1H, and this showed better economies of scale as MTQ moved along in the financial year. The FY 2010 resulted in a drop of 8.8% in revenues while COGS dropped by a larger 16.1%, resulting in a RISE in gross profit of 4.2%. Cost control is very apparent at this juncture and it was a very good sign that even though revenues fell due to decreased spending by oil majors on E&P, MTQ had managed to eke out a small rise in gross profit due to their better performing Engine Systems division. With the closure of unprofitable segments of MTQES, I believe this division will continue to grow and expand with improved margins as time goes by. Note the gross margin expansion from 36% for FY 2009 to 41.1% for FY 2010. 2H FY 2010 showed the largest margin expansion, jumping from 32.3% to 40.9%. Note that 2H was also the time the Bosch deal was sealed and Bosch Superstores started operating from November 1, 2009 (essentially 5 months of the 2H FY 2010). I cannot stress enough how important it is for gross margins to improve as this signals not just economies of scale, but also indicates possible pricing power. I will be keeping a close watch on gross margins in the upcoming 1H FY 2011 results to see if it continues to improve.

One point to note is the S$1.86 million worth of realized gain from divestment of quoted equities, which is an exceptional gain and should be removed from the computation of recurring EPS. MTQ had purchased quoted shares during the downturn (company not stated), and had proceeded to divest some of these holdings to raise cash (presumably to fund their Bahrain expansion and their Engine Systems division’s initiatives). Later in the Balance Sheet, it will be pointed out that MTQ is sitting on a fairly large unrealized gain (of about S$2.9 million) on its long-term shareholdings (marked-to-market gain).

One disappointing aspect to note is that administrative expenses had increased significantly (by 26%), even though revenue had fallen over the same period. An adequate explanation was not provided in Management’s MD&A and I can only suspect that this relates to higher expenses incurred to beef up their Bosch Superstores, as well as purchases to stock up on new line of items and other associated costs relating to Engine System’s expansion into Northern Territory. It will be worthwhile to question the Management on this increase during the upcoming AGM (and after reviewing the Annual Report) as it is a significant jump in light of the fact that revenues had in fact dropped. Staff costs had also crept up by 6.2% for FY 2010 (of which the majority of the increase came in 2H where the jump was 23.3%), and this could possibly be attributed to increased hiring as a result of the Bosch deal, in order to man the stores amid an increased range of products being displayed. I also took into account the fact that higher staff strength will equate higher training costs and staff welfare as well.

Finance costs were kept under control, dipping 8% year on year, as borrowings remained low. This may be set to change, however, with MTQ embarking on the second phase of their Bahrain facility construction soon. The Group had mentioned taking up debt to fund this expansion, as they wish to leave their cash intact for possible M&A opportunities. Therefore, I can expect a much higher financing cost to impact the bottom line in the year to come.

Profit after tax increased by 10% for FY 2010, but this was due to the fact that there was an exceptional gain of $1.863 million due to sale of equities. Stripping this out, net profit would have been about S$10.2 million (a drop of 6.4%). Net margin cum exceptional gain was 14.7%, but drops to 12.6% ex-exceptional gain (still higher than FY 2009’s 12.2% though). Considering all of the $1.863 million gain came from 1H FY 2010, this means 2H FY 2010 performance was much stronger and pulled up the overall performance for FY 2010, as net profit surged 21.8% to $4.8 million (no adjustment was needed as there was no exceptional gain). Assuming the momentum continues to build up for MTQ’s 2 core divisions, I can expect a reasonably better performance (barring unforeseen higher staff and operational costs) for 1H FY 2011. 2H FY 2011 will likely be impacted by the recruitment and subsequent training of the new Bahrain staff (without associated revenues). See interview on NextInsight as evidence of this piece of news, which I had used to factor into my projections and expectations.

At a valuation of 7.36 times historical earnings ex-exceptional gain, MTQ is not trading at expensive valuations; but neither is it cheap.

Balance Sheet Review


MTQ’s Balance Sheet is still rock-solid, for the fact that it has a net cash reserve of about S$16.9 million, just a slight drop from FY 2009’s net cash reserve of S$17.5 million. However, there are a few aspects of the Balance Sheet which are worth some attention, and I shall devote some attention to these items so that I may remind myself to watch over these “red flags” in the next few reporting periods, to ensure the numbers do not get out of hand. As an investor, that is the least I should be doing.

Trade and Other Receivables had increased by S$5.1 million or 31.5% to S$21.4 million, and this occurred even though there was a dip in revenues by 8.8%. It is always worrying when receivables increase when revenues dip, as it may signal a collectibility problem and potential bad debts moving forward. A possible explanation could be that the Engine Systems Division had garnered more sales as a result of the Bosch partnership, but also at the same time extended longer credit terms to its customers as a result of the increased sales. This has to be clarified by me during the next AGM as I consider this a potential red flag.

The good news is that current ratio had increased to 3.01 from 2.60 and quick ratio improved from 1.94 to 2.09, though this was mainly due to the increase in receivables. Receivables turnover days increased significantly from 66.4 days to 95.7 days, but payables turnover also increased from 68.7 days to 97.4 days. The cash conversion cycle had dipped from 2.3 days to 1.8 days; and though this is not a significant dip, it still presents a worrying trend as the cash conversion cycle is one of the important metrics by which to measure a company’s ability to convert receivables to cash faster than it pays its suppliers. I shall be closely monitoring this in future periods and will label this as a “red flag” as well.

Debt equity ratio has fallen from 7.7% to 4.6%, but with the scaling up of the construction of their Bahrain facility in FY 2011, I would expect this ratio to head higher in the following financial year. The good thing was that ROE remained high at 19.4% with minimal debt, down from 23.9% last year. As long as the Company can maintain such high ROE with minimal leverage, I would conclude it is still doing decently. This fact, coupled with the knowledge that the Company still has a healthy net cash balance, reassures me that my investment is still doing fairly well.

Cash Flow Statement Review

MTQ’s cash flow statement was, thankfully, quite healthy. A quick glance shows that the Group generated a healthy operating cash inflow of S$3.9 million, despite seeing a big rise in Trade Receivables which resulted in an “outflow” of S$8.5 million (quotation marks are used because this Cash Flow Statement was prepared using the Indirect Method). Inventory increase accounted for a cash “outflow” of S$2.5 million, and together these two items resulted in a cash outflow of S$11 million. One reason I can think of was the aforementioned Bosch Superstore customers increased credit terms, and also the stocking up of the Superstores to include Bosch range of products as well as MTQES’ own range, which resulted in the higher inventory figure.

It’s also worthwhile to note that income taxes had fallen substantially to S$2.2 million from last year’s S$7.1 million, which included capital gains tax paid on MTQ’s disposal of RCR Tomlinson. Assuming (and this is a big assumption) that inventories and receivables’ days normalize after MTQES’ expansion gains momentum, MTQ’s cash inflows from operations should improve substantially. However, their Bahrain expansion could throw a spanner in the works as more cash needs to be paid out to hire workers and train them for the new facility; thus both these events may negate each other and the net effect may still be more cash flowing out rather than in.

Purchase of PPE took up about S$5.1 million for FY 2010, slightly down from S$5.7 million the year before. Because of this capex, one can easily note that there is negative free cash flow for MTQ as capex exceeds operating cash inflows; however with the scaling up of MTQES’ operations in Australia and in future, the operation of the Bahrain complex, MTQ may see positive free cash flow in 3 to 5 years time.

Most of Financing cash flows were made up of repayment of bank borrowings as well as payment of dividend. It is quite surprising (to me at least) that the Group can still maintain its dividend payout of interim 1c per share and 2c per share final even though there are spending to build Phase I of their Bahrain complex.

Part 2 shall discuss each business division and their margins, and I shall discuss how each business division is performing relative to last year; and also provide a snapshot of what I feel an investor can expect from each division in the coming year.

Sun Tzu - War On Business Part 5 (Ozone Gym)

Episode 5 of the Sun Tzu series brings us back to Beijing, China once again. This time we are introduced to a businessman by the name of Tomer Rothschild (“Tomer”), who has started up a chain of gyms called Ozone Gym around Beijing. It has been 7 years since Tomer set up the gyms and extended its branches around Beijing, but he is just barely surviving. James takes a visit to one of his gyms to see the facility, and also does some impromptu interviews with some gym goers around the area, and comes up with his conclusion on why the business cannot grow.

The main problem which James first notices is that China people like to do their exercise outdoors! This means that most of the Chinese will reject the idea of western style gyms as the climate and weather in China is generally conducive for outdoor exercise (generally cool and low humidity). This fact, coupled with Tomer not having a concrete marketing plan to draw in more crowds and advertise for Ozone Gym. James interviews Alejandro Angulo, one of the body combat instructors, who mentions that on a good month, there are about 100 joiners but on a bad month, as little as 30 people sign up. Considering there are 10 branches around Beijing, this translates to as little as 3 to 10 people per outlet per month. This is way below the optimal level required for operations to sustain themselves; James also brings in a venture capitalist and business expert called Cha Li, who commented that the gyms seemed to have lots of space but was simply lacking in crowds!

James went on to randomly interview some passers-by near Tomer’s gym, and one gym goer could not even recall the name of Tomer’s gym, displaying a lack of brand loyalty and non-existent brand awareness. Others simply did not even know a gym existed nearby, even though they had passed by the area umpteen times.

Armed with these facts, James and Cha Li met up with Tomer in the War Room and gave him advice on how to grow his business. James suggested initiating a marketing campaign (using traditional and guerrilla marketing) by tying up with a sports brand, in order to draw in the crowds and give membership a big boost. Tomer agreed to give it a try and roped in his experienced Management team to organize the campaign and get it going. Photo shoots were taken of models exercising, which were to be placed on the promotional banners and flyers to be given out. There were promotional items given out for referrals as well, a tactic which had worked well in the past (though its efficacy was limited by the lack of marketing support and planning prior to the current launch). Prizes would also be given out for new members (in a tie-up with Nike), and the marketing budget was to be kept at 5% of revenues (which is usually a standard).

In one ingenious move, Tomer’s team had also managed to liaise with the Beijing Subway Company to distribute brochures on the subway targeting the East Side of Beijing, which did not have any Ozone Gym outlets. Nancy Gao is the appointed manager in charge of launching the campaign, but had warned that there was a possibility the campaign will not take off due to the pending Lunar New Year holidays, when a lot of Beijing people were travelling to other parts of China for visitation. Tomer chose to ignore this advice and push on with the campaign, as he was afraid that the time lag would mean valuable time wasted in trying to recruit more members.

At the end of the one-month promotion, the result was that only 400 new members had signed up. Normally, this would be considered a resounding success; but James commented that Ozone Gym had 10 outlets, and assuming Tomer had spent considerable sums of money on this marketing campaign, it implies that the costs had far outweighed the benefits. James attributed it to bad timing and planning as Tomer had pushed ahead with the promotion in spite of being warned by his Chinese Management Team, and as a result of the bitter winter weather and the CNY period, had failed to attract more people than it should have. James concluded the episode on a sombre note, saying that Tomer did not win this battle.

Lessons to be picked up from this episode included:-

1) Survey your target segment’s lifestyle habits before plunging into a business – Apparently, Ozone Gym had been opened for nearly 7 years but membership numbers were still dismal. Tomer had neglected to understand the Chinese penchant for outdoor activities and exercising outdoors, or maybe he felt that habits would shift towards more “western” practises with the modernization of China. In reality many of the younger Chinese are indeed more westernised in terms of thinking, beliefs and behaviour; but this does not transcend all the way down to the way they do their exercise, as is evidenced by the slow and low take-up rate for Tomer’s Ozone Gym.

2) A good marketing plan is important – The lack of a vision and marketing plan seems to be a common theme for most of the Sun Tzu episodes thus far, and most of the time the CEO (boss) is clueless about expansion and how to go about it. In Tomer’s case, he wanted to expand but did not know how to go about creating a marketing plan to achieve his objectives. I guess James and Cha Li acted as a sort of catalyst to make him get going.

3) Moderate spending on capex if demand is low – This is something which I had observed of Ozone gyms, and that the scale of the gym is very large and has a lot of floor space with many pieces of equipment. Perhaps Tomer was emulating western style gyms which are generally spacious and have many different types of equipment, to provide a good assortment of training aids for those who wish to work out. But seeing that demand for his gyms was not high in the initial years, one wonders if he would have been better off down-scaling his gyms to smaller areas in order to save on rental costs and staff costs. He could have designed his gym to cater to niche customers instead, and this is linked to the previous point on not having a detailed marketing plan, thus he just carried on operating as usual without trying to reduce his costs.

4) Good advice should be taken – This point is simple and straightforward. If Tomer was aware that his Management team (which was composed of Chinese) knew the ground well and the habits and culture of the people, then he should have taken their advice seriously to delay the launch of the marketing campaign till after Chinese New Year. As a result of his insistence to push forward with the campaign despite objections from his team (who reluctantly acceded to his plan because he was the “boss”), it resulted in poor response and a lot of marketing dollars spent but wasted.

This is the first episode in this series I have seen in which James concludes that due to mis-timing, Tomer would not be successful. It would seem that not everyone which he advises in the War Room ends up executing their plans well, as evidenced by the way Tomer (mis)managed the marketing campaign.

Watch out for the summary and lessons learnt for the next episode six (6) on Witchmount Winery in Australia.

Note: Visit Ozone Gym’s website at
http://www.ozonefitness.com.cn/eshow.asp

Why Traders are Important for Value Investing

OK, before someone lambasts me for switching to trading, please read and re-read the title carefully. I mentioned that “traders” are important for investing, and not “trading”. The use of the two somewhat similar-sounding words makes a whale of a difference though, and this post shall proceed to explain why, and how I can justify the above statement.

In any stock market, there always exists an abundance of traders/speculators while there are usually only a handful of investors. The investors sit on their butts and wait patiently for their shares to reach their perceived fair value, all the while exercising patience and engaging in detailed due diligence to ensure all is moving right. By contrast, the active traders are the one who zip around like dragonflies on a hot noon day, flitting from counter to counter in the hopes of entering and exiting with maximum profit (and minimum loss). There exists a certain relationship between the two camps – one whereby each takes advantage of the other’s actions to generate opportunities to make money. Let’s take it from the point of view of the investors, first.

Investors have the unenviable job of researching, reading and analysing company fundamentals, and waiting for margin of safety to appear when Mr. Market presents it. Traders help to accelerate this process by 1) creating liquidity and also 2) creating instances where mis-pricing is so evident that investors will be “forced” to react. These two factors alone are pertinent reasons for the importance of traders to the investing process. Liquidity can be seen as the oil which greases the wheels of the stock market, and it is important when an investor wishes to take a position in a company which he feels offers long-term investment potential AND a margin of safety. However, it is well-known that illiquidity in some counters creates wide bid-ask spreads, and this can severely hamper an investor’s ability to purchase a significant stake in a company at a low enough price due to the illiquidity premium, and also the prohibitive bid-ask spread which results in higher fees. Traders are responsible for providing much-needed liquidity, so that an investor can find the volume to purchase a sizeable stake, and also to avoid the associated higher costs which come from a wide bid-ask spread.

During instances of market frenzy or market panic, traders are responsible for the gamut of emotions which flood the stock market, creating over and under-valuations of sound securities. The emotional tenor of the market is determined by these traders, and share prices can be severely marked up or down depending on the prevalent news, rumours and/or reports. Investors make use of such opportunities to find bargains to purchase, when share prices are uncharacteristically depressed due to one-off events or due to fear and panic in the markets. Conversely, traders who are excessively exuberant will also bid up prices of securities far above their fair value, and this presents opportunities for investors to offload their shares for a comfortable profit, as the share price may have run far ahead of fundamentals and prospects.

The above two situations illustrate how traders help investors by reducing the opportunity cost of holding cash, and also creating situations which benefit the conservative investor. Investors, on the other hand, also help traders by providing liquidity with their persistent buying or selling, especially when they target to invest in or divest a certain company. Generally though, I believe the presence of traders helps to enhance the opportunities present for an investor, but the investor must do his own due diligence and be vigilant for such opportunities presented by Mr. Market.

However, it should be noted that traders usually stick to companies with heavy volume (institutional favourites), and hence the “churn” which is produced will usually be limited to the same few blue chips and/or speculative counters which see cyclical volume spikes. Certainly, if there are bargains to be found, they may mostly reside in the quiet, untraded counters which dot the landscape; and these may still present the same problems to investors who wish to accumulate a sizeable stake. Liquidity is contingent upon certain events in which the market either recognizes the true intrinsic value of a forgotten gem, or a corporate event which throws the company into the spotlight. Both instances do not create conducive buying opportunities, however, because people will then bid up the price of the under-valued security. Hence, it may still be a challenge for investors to accumulate good companies in suitable quantities to make a positive difference to their portfolio.

Ultimately, investors should still watch for events to unfold which may offer them some glimmer of hope to accumulate at a price far lower than intrinsic value, in order to maximize margin of safety. A lot of patience and fortitude is required for such an operation to take place successfully. In the meantime, it would be a worthwhile exercise to let cash pile up until it can be deployed at a suitable time and in suitable securities which can yield a decent (better than inflation) long-term return.

April 2010 Portfolio Summary and Review

April 2010 started out boring, but ended up being somewhat interesting and filled with significant doses of news – well, enough to keep me occupied and my mind churning anyhow. Add to that the news of the Icelandic volcano disrupting air travel in an unprecedented fashion, and you really end up with one of the more intriguing months thus far. The weather was also strangely wet, considering it was April and close to the traditional dry season in Singapore. It was practically raining (thunderstorm, not drizzle) daily and I was careful to have my umbrella on hand wherever I went to.

Before I start out on summarizing some economic and business news, first of all I must state how thankful I am for the opening and commencement of the Circle Line, which has managed to cut short my travel time by about 40%. Even though I am not a shareholder of SMRT, I can still appreciate the social good which they are bringing to ordinary, working-class citizens such as myself. The time savings can be used for more research, which in turn translate to more money and also additional quality time with my family and friends. In time to come, I foresee that Singapore will become a very well-connected country via MRT lines which are in the midst of sprouting up like mushrooms, with the current Downtown Line being constructed followed by the Thomson Line. In 8-10 years time, there are more plans for an Eastern Region Line and also other lines which will probably make Singapore’s route map look like that of the London Tube!

The most mind-blowing business news in recent weeks was the civil suit brought against Goldman Sachs, and now Britain is also launching a probe into Goldman’s affairs to see if there was any fraud involved. This may, in turn, precipitate further actions against other “errant” Wall Street Banks which knowingly sold CDOs and CDS to an unwitting public and withheld important details about the counter-party. Of course, the banks took the brunt of the news with their share prices tumbling, as the SEC would probably go on a “witch-hunt” to root out more wrong-doing and to pin the blame of the financial crisis on one or more parties. On another note, Greece and Portugal’s debt was also downgraded by Standard and Poor’s, resulted in a major sell off as there were fears of another debt contagion infecting the economics of the Eurozone.

China’s economy continued to expand at a sizzling 11.8% in 1Q 2010, thus raising concerns about over-heating (I am sure this was brought up every single time by the USA, especially on the RMB reforms, but they always fall on deaf ears anyway). The whammy came in the form of even more draconian measures implemented by the Government to control and rein in runaway property prices, which had risen far faster than incomes in the last 2-3 years. Just Google to find out more about the measures which were taken to cool the property market, and you can tell that the Chinese mean serious business this time. Whether or not these measures will have a long-term impact to cool prices remains to be seen, though.

In Singapore, our own property market continued to sizzle, with private home prices rising 5.1% in 1Q 2010. The URA Index is 1.9% below the peak achieved in 2008, but “experts” believe this level will be breached in a matter of time. The prices of EC (Executive Condos) also shot up 70% from 1Q 2007 to 1Q 2010, compared with just 39.6% rise in mass market home prices. Developers sold 1,761 homes in total for March 2010, which was 47% more than in Feb 2010. From the looks of things, the recent Government measures to curb speculation and cool prices have failed to rein in the buyers, who are continually pushing prices to new highs. HDB resale prices remain at all-time highs and COV was last reported to be S$24,000, putting a lot of newly wed couples in misery as they search for a house which is more “affordable”. In spite of what the Government says, affordability is seriously becoming a challenge and many Singaporeans face the prospect of being indebted for more than half their lives, judging by the lofty HDB and private home prices. Unless prices come down somehow, a lot of Singaporeans (and PRs) are going to spend most of their lives fattening the pocketbooks of the banks which are granting them their mortgage loans.

For this month, FSL Trust and Suntec REIT released their 1Q 2010 results, and these were largely within expectations. Both had declared dividends as well and this will add to my cash stash for May 2010. I continued to build up my cash reserves and there were no transactions made during the month of April 2010. Currently, I may be looking at one or two potential companies for investment, though valuations at this point can be said to be “fair” or “expensive” (depending on which company you looked at), hence making the selection process all the more difficult as I insist on obtaining a margin of safety for the purpose of capital preservation. Below is a snapshot of my portfolio and associated comments for April 2010:-


1) Boustead Holdings Limited – Boustead was relatively quiet for April 2010, with only a minor announcement that they were liquidating a 30% associated company called Optivest Investments Pte Ltd. They will be releasing their FY 2010 results some time in late May 2010.

2) Suntec REIT – Suntec REIT released their 1Q 2010 results on April 27, 2010. A distribution per share of 2.513 cents was declared (down 13.9% from same period last year), and based on my cost of S$1.11, this represents an annualised yield of about 9%. The dividend will be paid on May 28, 2010.

3) First Ship Lease Trust – FSL Trust released their 1Q 2010 results on April 20, 2010. The DPU was 1.5 US cents per share (as expected), and the charter-free value of their vessels had increased 5.5% from US$590.5 million to US$623 million as at March 2010; representing 129% of the outstanding indebtedness of US$484.3 million. The minimum value to loan coverage ratio stands at 100% until the end of 2Q 2011, after which is reverts to 145%. Considering the shipping industry is making a gradual recovery, and that FSL Trust is voluntarily paying down about US$8 million per quarter, this means that at the end of 2Q 2011 FSL would have paid back another US$40 million, which reduces indebtedness to US$444.3 million. Assuming another 10% rise in asset value to US$685 million, this would represent a loan to value ratio of 154%, and would not trigger any loan redemption covenants. But please note that the 10% increase I used is arbitrary, and is just a conservative projection. If the increase is 5%, the value would be US$654 million and the ratio would be 147%, which means FSL would still be “safe”. In the meantime, the Trust also announced that they were finalizing an acquisition with the proceeds from the equity issuance of US$28 million, so this acquisition may be yield-accretive and add to DPU; while at the same time Management have an eye on the debt markets and Asian Banks to assess if more funds can be tapped to grow the Trust.

4) Tat Hong Holdings Limited – There was no news from Tat Hong during April 2010. Their FY 2010 results will be released some time in late May 2010.

5) MTQ Corporation Limited – Since I had already written a detailed post on MTQ back on April 23, 2010, I will not say anything more about recent corporate developments in this portfolio review. However, MTQ released their FY 2010 results on April 30, 2010. Revenue fell by 9%, while gross margin increased from 36% to 41.1%; and net profit went up by 10%. A final dividend of 2 cents per share was declared. I will be doing a full review and analysis of the FY 2010 results in a later post.

6) GRP Limited – Unsurprisingly, there was no news from GRP for the month of April 2010. In other words, shareholders are still waiting with bated breath to find out what Management intend to do about their cash stash!

7) Kingsmen Creatives Holdings Limited – There was no news from the Company for April 2010. The AGM was held on April 26, 2010 and the Annual Report FY 2009 made a pretty interesting read, though it did not shed much light as to the future plans and prospects of the Group. Watch out for the 1Q 2010 results, which should be released some time in mid-May 2010.

Portfolio Review – April 2010

My realized gains increased to S$54.0K as a result of the dividend from FSL Trust for April 2010 (to be received in May 2010). The portfolio improved from an unrealized gain of +10.5% to an unrealized gain of +14.9%.

May 2010 should see very important corporate result announcements from MTQ, Boustead as well as Tat Hong, and dividends will start to trickle in from Kingsmen Creatives, Suntec REIT and FSLT Trust. I am also hoping the three companies which are announcing results in May will also, at the same time, declare decent dividends to boost my cash inflows.

My next portfolio review will be on May 31, 2010 (Monday).

Sun Tzu - War On Business Part 4 (Asian Woman)

We have come to Part 4 of the Sun Tzu series, and so far it’s getting more and more interesting with many examples of how to improve on business operations and how to apply strategic thinking. James is articulate and has good insights on all sorts of businesses; and he also engages “consultants” in the form of experienced entrepreneurs who are knowledgeable about a particular industry to give their expert views and opinions. This all adds up to a holistic appraisal of the business, and he is able to deliver his “verdict” on how to improve. My lingering grouse is that totally no numbers are presented at all throughout the episodes thus far, and this is one aspect which can be improved on.

Episode 4 goes back to Singapore again, and shows an entrepreneur called Kavita Thulasidas (an Indian lady) who designs a specialized line of clothing. She has a retail shop somewhere near Selegie area and her shop is called Asian Woman. The designs are a fusion of Western and Indian styles and in her own words, are supposed to reflect contemporary designs catered to a higher-end clientele. Unfortunately, James’ first observation is that the location of the shop is poor, in that it is located in a run-down building where there is only one other retailer present. In true Sun Tzu style, he mentions that Terrain (“Di” in Chinese) is one of the important aspects of a battlefield, and one must position oneself in a good location to be able to capture maximum consumer traffic and give good visibility to the business frontage.

As James steps into the shop, he is pleasantly surprised by the rich and elegant designs of the clothing, many of which have been hand-sewn with beads and sequins. Kavita then shows James a room upstairs where many of the gowns and dresses are further altered and “made-to-measure”. It appears that many of the garments are customized and James is forced to rethink the business model, as he previously thought that the shop attracts walk-in customers. When he speaks to one of the customers, who is an Indian lady buying a gown for her wedding to be held in Scotland, he realizes that Kavita attracts a dedicated customer base who seek her out for her special expertise in designing beautiful gowns, meaning she serves a niche segment of the market.

The problem, as Kavita relates, is that she had previously tried to expand by opening another retail shop in a busy mall but was forced to close it down as she did not want to divide her time between the two outlets, and also because of family commitments. Also, she does not have the expertise in terms of a good Management team to help her out, and like Dominic and Feng, is a very “hands-on” entrepreneur. She is thinking of how to expand her business instead of staying as a one-shop business, but is unable to break out of her current business model. That’s where James comes in, as he also enlists the assistance of Elim Chew, the founder and CEO of the clothing line 77th Street.

First, James did a simple test. He took some of Kavita’s designs and put them on models and “displayed” the models in Orchard Paragon and asked some passers-by (shoppers) for their opinions. The surprise came when many of these “contemporary” women felt that Kavita’s designs were somewhat old-fashioned and antiquated, while others remarked that there was “too much cloth” and the dresses look too layered. James then suggested to Kavita in the War Room that she had to start a new clothing line to differentiate from the old line, all the while keeping both lines distinct and separate so as to not create confusion. Another point James brought up was Kavita’s business model of selling her clothes in her own retail shop. Elim also agrees that this does not give the brand much visibility and Kavita is unable to scale up ther operations easily. Elim herself owns about 16 outlets and has expanded her brand successfully over the years. James therefore suggests using different channels to push the brand, and to market it through retailers. He gives Kavita 3 months to work on this and to hold a fashion show to display her new line to potential retailers.

The process of starting a new line and organizing the fashion show is far from easy, and Kavita works hard at it. James also enlists the help of an expert with fashion shows, who is on hand to give Kavita some advice about salient aspects of a successful fashion show, like the timing of the models and the banners to be used. Kavita starts a new fashion line called “Vita”, but in the end the fashion show is hurried and is described it as “Schizo”!

The lessons which can be garnered from this episode include:-

1) Owning a good location for a retail outlet – Obviously, a retail outlet specializing in high-end fashion needs to be located in a good mall where human traffic is high. This contributes to the perception of the store even though rental costs would be higher. James did mention that being located in a remote part of Singapore would “cheapen” the image of the brand.

2) Understanding your target customer and consumer behaviour – Apparently, Kavita did not have much clue as to what her consumers were looking for or found desirable. When James conducted a street survey using her clothing decked on models, the result was surprisingly unpleasant. So it pays to be aware of one’s consumers and to keep up with trends, especially if you are in the fast-moving fashion industry. Unless you are carrying a line which is a timeless classic, it will be prudent to innovate and evolve to remain relevant.

3) Product Segmentation is the key to a successful business – Notice how James encourages her to start a separate line in addition to her own existing line? This is to cater to more than one customer segment and to create multiple streams of income; plus broaden her customer base. This is one reason why drink companies like Coca-Cola have come up with variants such as Coke Zero (without sugar) to cater to health conscious people. If one segments their product lines clearly and creates brand loyalty in each segment, this could lead to significantly improved sales performance and clear revenue growth.

4) Succession Planning – A key theme of this episode was also succession planning, as Kavita was the only one who truly knew how to run her own business and no one else did! She herself admitted that she had not planned for any contingencies should she suddenly be unable or unavailable to run the business, and this could have a negative impact on her legacy.

5) Lack of proper delegation – Another problem seen her with Kavita which was similar to previous episodes is that the owner tends to be a little too “hands-on” and does not have proper delegation of key duties to skilled personnel to handle. If this is fulfilled, it can free up the CEO (i.e. boss) of valuable time to strategize and plan, which is basically what a CEO is for!

Watch out for Episode 5 of Sun Tzu where I will be discussing on a gym business in Beijing called Ozone Gym, which has interesting implications on understanding demand, and how lifestyle trends and culture affect business decisions.

Check out Asian Woman's website at http://e-stylemart.com/

MTQ – Commentary and Review of Recent Corporate Developments

MTQ is not normally a company which releases a lot of corporate updates or announcements. In fact, since its market capitalization is consistently below S$75 million, there is no mandatory requirement for it to report quarterly results; and this actually helps to cut down on manpower costs involved in the additional reporting requirement to SGXNet. However, in the recent month MTQ has released quite a few updates on corporate developments, thus as an investor who keeps a close tab on the company, I feel I should give my thoughts on these developments and how they may impact the company in the next few years.

The first announcement was actually released on March 15, 2010 and concerns the acquisition of a company called Premier Fuel Injection Service Pty Ltd (‘Premier”) by MTQ Engine Systems (Aust) Pty Ltd (“MTQES”). Premier is a privately-owned company and is engaged in the diagnostic and repair of diesel fuel injection parts and engine management systems. The primary reason for this acquisition was to expand MTQES’ network of 9 branches in Australia (recall MTQES also partnered with Bosch as announced back in Nov 2009). Premier is located in Northern Territory, which is one of the few capital cities in which MTQES has no presence in. The consideration for the purchase was A$500,000 (about S$640,000) and will be financed through internal funds and fully settled in cash. MTQES will operate from Premier’s existing workshop for 3+3 years (subject to extension) and they have also employed Brian Agostini (the founding shareholder of Premier) for his technical expertise.

Comments on this announcement – As mentioned in the press release to this announcement, this acquisition will broaden the reach of MTQES and enable MTQES to enhance value to new and existing customers. It can be viewed positively as the transaction did not cost much (valued almost at cost, so MTQ are paying 1x book for it; earnings were not mentioned so unsure what valuation MTQ paid for Premier), and could be funded by internal cash flows are MTQ has a track record of generating steady Free Cash Flows. MTQ was also smart in retaining the founding shareholder to run the business, and this is in line with Warren Buffett’s philosophy of retaining Management to run the business even after he acquires companies. This is because Management usually has the connections and network to enable the business to grow and flourish further. Assuming minimal incremental investment is made into Premier as compared to its revenue-generating potential, this deal could result in enhanced top-line growth for the Engine Systems division and may also result in greater economies of scale as MTQES now have 10 branches within Australia. Gross margins could improve as the deal with Bosch also has a positive effect on the division, while Chairman Kuah Kok Kim hinted that Northern Territory’s proximity to Timor Leste and Indonesia may have positive spillover effects into that region which may lead to further growth for the division. Interestingly, if one traces back to FY 2003 to FY 2005, MTQ had unsuccessfully tried to penetrate the Indonesian market by setting up a subsidiary in Surabaya at the time; and plans were afoot in FY 2004 to expand to other major Indonesian cities. However, by FY 2005, MTQES’s Indonesian operations had yet to turn a profit amid severe competitive pressures, and the division was folded soon after. It is hoped that MTQES had learnt a valuable lesson from 5 years back about Indonesia’s market and not repeat the same mistakes again.

The second announcement and press release were made on April 5, 2010 and involved the award of a contract by MTQ Oilfield Services W.L.L to a building contractor worth US$9.6 million (about S$13.15 million) to construct a 2-storey workshop cum administrative block on the Bahrain International Investment Park, where MTQ’s new facility will be located. The agreement was signed on March 30, 2010 after a rigorous tender process and the entire investment will be funded by a mixture of internal cash flows and bank borrowings (the exact ratio was not mentioned). Mobilisation has already begun and this Phase 1 of the construction is expected to be completed by December 2010. Phase 2 will only commence after initial operations begin at the new workshop cum office.

On a separate note, the press release also makes mention of Tatweer Petroleum, a joint company between National Oil and Gas Authority of Bahrain, Occidental Petroleum Corporation and Mubadala Development Company. They intend to develop the Bahrain oil field in the next 20 years and MTQ views this as being positive for their oilfield engineering division in the long-term.

Comments on this announcement – Finally, the Bahrain expansion is getting on track! Recall that the very first announcement was made on January 5, 2009 about MTQ’s intention to expand into the Middle East, and that Bahrain had been chosen as the country of choice for their expansion due to many positive factors. Since then, MTQ had set up a subsidiary company in Bahrain (which is 100% owned) in June 2009, and then proceeded to increase their injected capital in this subsidiary on March 30, 2010. After nearly 1.5 years of preparation, the construction of the new facility is under way and I am glad to hear that everything is on schedule and is proceeding as planned. MTQ has also identified Bahrain as having huge potential for oil development in the next decade or so, and this paves the way for long-term business in the region, in spite of there being other incumbent competitors. Of course, my question now would be how much MTQ will eventually spend building the facility (taking into account possible cost overruns), and also how much bank borrowings they will require to take up. All these factors will significantly affect MTQ’s near-term dividend payout and also showcase their ability to manage their cash flows. Knowing that Kuah Kok Kim is a conservative and prudent businessman, I am sure he would have computed the correct ratio of bank borrowings to internal cash flows so as to not over-strain the Balance Sheet. On the other hand, using less borrowings and more internal cash may put a strain on the Cash Flow Statement and reduce the availability of short-term working capital as progress payments have to be made to the contractors for the next 8 months till Dec 2010. Hence, this is going to be a delicate balancing act and I hope more insights will be revealed when MTQ releases their FY 2010 results in late May 2010.

The third announcement came on April 14, 2010 and was in two parts. The first part mentioned the sale of land cum property by MTQES at 32 Raynham Street, Salisbury, Queensland on April 12, 2010 for A$975,000 (about S$1.25 million, less agent fees). Considering the written down value (WDV) of the land and building was only A$407,000 (about S$521 million), MTQES will stand to recognize a one-off exceptional gain of about S$729,000. The rationale given for the disposal was for MTQES to continually streamline its operations and that the site at Salisbury posed challenges as it was not optimised to support the level of business activities (implying it was too small and perhaps run-down, with old equipment).

The second part of the announcement was a major one as it mentioned that Mr. Kuah Kok Kim would step down as Executive CEO with effect from July 1, 2010. Stepping into the shoes of CEO would be his son, Mr. Kuah Boon Wee, who has experience in helming the growth of PSA as well as working as the ex-CFO of ST Engineering. He is a very capable and prolific man who has a degree in Mechanical Engineering and is also a Qualified Chartered Accountant. Mr. Kuah Boon Wee has been on MTQ’s board since 2006 but is now resigning from PSA to take on a more active Management role and steer the Company to better organic growth, and also on overseas ventures. Mr. Kuah Kok Kim will remain as the Chairman of MTQ to provide strategic guidance and advice to the Group. This was all part of MTQ’s succession planning to ensure continuity in the business.

Comments on these announcements – The first part about selling the property seems (to me) like a very good tactical move, as retaining an ageing building with old equipment would most likely pose more harm than good. Since MTQES had already consolidated all its operations under one roof since July 2009 (and probably was enjoying better economies of scale as a result), it made commercial sense to put up the Salisbury property cum land for sale to realize some cash. Even though the transaction will result in a one-off gain for MTQ (probably to be recognized in FY 2011), I think the more important aspect of this sale is to claw back some cash of about S$1.25 million, which will boost MTQ’s cash reserves for their expansion plans.

The second piece of news about the leadership handover and succession plan was surprising, though not unexpected. It would seem that the Chairman was already planning for the long-term and putting in place measures to ensure MTQ grew from strength to strength. I guess this may be why Mr. Kuah Kok Kim purchased 93,000 shares in his own name at S$0.72 back on March 17, 2010 (just a few days after announcing the purchase of Premier). With Mr. Kuah Boon Wee’s extensive experience in overseas businesses with PSA, as well as his strong understanding of numbers, accounting and financials from his previous work as a CFO (and bolstered, no doubt, by his prestigious Chartered Accountancy degree), MTQ may be set for much greater growth in the years to come.

It will indeed be exciting to see what the future has to offer for MTQ in the near-term, as their new facility takes shape in FY 2010 and 2011. The Company is on the cusp of steady growth and it should continue to do so in the steady hands of the Kuah Family. I will be providing a FY 2010 review and analysis once the results are out in late April 2010, but note the review may only be posted some time in June 2010 as Boustead and Tat Hong will also be simultaneously releasing their FY 2010 results in May 2010 (I will be kept inordinately busy!).

P.S. - Do note that MTQ had recently revamped their website and it now looks more modern and is easier to navigate, plus it has news announcements stretching all the way back to FY 2001! Check it out to read up more about the Group.